What are the Costs of Meeting Distributional Objectives for Climate Policy?

36 Pages Posted: 25 Oct 2010

See all articles by Ian W. H. Parry

Ian W. H. Parry

Resources for the Future

Roberton C. Williams

University of Maryland - Department of Agricultural & Resource Economics; National Bureau of Economic Research (NBER); Resources for the Future

Date Written: October 2010

Abstract

This paper develops an analytical model to quantify the costs and distributional effects of various fiscal options for allocating the (large) rents created under prospective cap-and-trade programs to reduce domestic, energy-related CO2 emissions. The trade-off between cost effectiveness and distribution is striking. The welfare costs of different policies, accounting for linkages with the broader fiscal system, range from negative $6 billion/year to $53 billion/year in 2020, or between minus $12 to almost $100 per ton of CO2 reductions! The least costly policy involves auctioning all allowances with revenues used to cut proportional income taxes, while the most costly policies involve recycling revenues in lump-sum dividends or grandfathering emissions allowances. The least costly policy is regressive, however, while the dividend policy is progressive, and grandfathering permits is both costly and regressive. A distribution-neutral policy entails costs of $18 to $42 per ton of CO2 reductions.

Suggested Citation

Parry, Ian W. H. and Williams, Roberton C., What are the Costs of Meeting Distributional Objectives for Climate Policy? (October 2010). NBER Working Paper No. w16486, Available at SSRN: https://ssrn.com/abstract=1696398

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Roberton C. Williams

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